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Labor markets and institutions

Institutions have important consequences for the performance of households, companies, governments, and entire markets—they determine the welfare of nations. Contributions to this subject area explore the underlying mechanisms and the politico-economic determinants of such structures. Many provide background analyses that offer evidence on how new institutions and policies would affect labor markets.

Declining union power would not be an
overwhelming cause for concern if not for rising wage inequality and the
loss of worker voice

The micro- and macroeconomic effects of the
declining power of trade unions have been hotly debated by economists and
policymakers. Nevertheless, the empirical evidence shows that the impact of
the decline on economic aggregates and firm performance is not an
overwhelming cause for concern. However, the association of declining union
power with rising earnings inequality and a loss of direct communication
between workers and firms is potentially more worrisome. This in turn raises
the questions of how supportive contemporary unionism is of wage solidarity,
and whether the depiction of the nonunion workplace as an authoritarian
“bleak house” is more caricature than reality.

In post-Soviet countries, well-functioning
institutions are needed to foster productive entrepreneurial development and
growth

Supportive institutional environments help build
the foundations for innovative and productive entrepreneurship. A few
post-Soviet countries have benefitted from international integration through
EU membership, which enabled the development of democracy and free market
principles. However, many post-Soviet economies continue to face high levels
of corruption, complex business regulations, weak rule of law and uncertain
property rights. For them, international integration can provide the needed
support to push through unpopular yet necessary stages of the reform
process.

Market adjustments to tax evasion alter factor
and product prices, which in turn determine the true impact and
beneficiaries of tax evasion

To determine the full effects of taxation on
income distribution, policymakers need to consider the impacts of tax
evasion. In the standard analysis of tax evasion, all the benefits are
assumed to accrue to tax evaders. But tax evasion has other impacts that
determine its true effects. As factors of production move from tax-compliant
to tax-evading (informal) sectors, changes in relative prices and
productivity reduce incentives for workers to enter the informal sector. At
least some of the gains from evasion are thus shifted to the consumers of
the output of tax evaders, through lower prices.

Unemployment insurance generosity should be
greater when unemployment is high—and vice versa

High unemployment and its social and economic
consequences have lent urgency to the question of how to improve
unemployment insurance in bad times without jeopardizing incentives to work
or public finances in the medium term. A possible solution is a rule-based
system that improves the generosity of unemployment insurance (replacement
rate, benefit duration, eligibility conditions) when unemployment is high
and reduces the generosity when it is low.

Long-term unemployment did not rise under the
flexicurity model during the great recession, despite the large drop in
GDP

Before the great recession of 2008–2009, the
“flexicurity” model (with flexibility for firms to adjust their labor force
along with income security for workers through the social safety net)
attracted attention for its ability to deliver low unemployment. But how did
it fare during the recession, especially in Denmark, which has been
highlighted as having a well-functioning flexicurity model? Flexible hiring
and firing rules are expected to lead to large adjustments in employment in
a recession. Did the high rate of job turnover continue or did long-term
unemployment rise? And did the social safety net become overburdened?

Denmark is often highlighted as a “flexicurity”
country characterized by rather lax employment protection legislation,
generous unemployment insurance, and active labor market policies. Despite a
sharp and prolonged decline in employment in the wake of the Great
Recession, high job turnover and wage adjustments worked to prevent
long-term and thus structural unemployment from increasing. While many have
been affected by unemployment, most unemployment spells have been short,
which has muted the effects on long-term and youth unemployment. Recent
years have seen a sequence of reforms to boost labor supply and employment,
including measures targeting the young, the elderly, and immigrants.

The French workforce is now much better educated, but
unemployment, underemployment, and low-income work present challenges

France has the second largest population in the EU. Since
2000, the French labor market has undergone substantial changes resulting from striking
trends, some of which were catalyzed by the Great Recession. The most interesting of
these have been the massive improvement in the education of the labor force (especially
of women), the resilience of employment during the Great Recession (albeit with a very
late recovery), and the dramatic emergence of very short-term employment contracts and
low-income independent contractors, which together fueled earnings inequality.

Some entrepreneurs and would-be entrepreneurs
face financial and bureaucratic barriers to starting a business

Because entrepreneurial activity can stimulate
job creation and long-term economic growth, promoting entrepreneurship is an
important goal. However, many financial, bureaucratic, and social barriers
can short-circuit the process of actually starting a business, especially in
transition economies that lack established institutional systems and
markets. The main obstacles are underdeveloped financial markets,
perceptions of administrative complexity, political and economic
instability, and lack of trust in institutions. Gender disparities in the
labor market are also reflected in less entrepreneurial activity among women
than men.

In the future, jobs will be created by those
bold enough to transform new ideas and knowledge into innovations

Globalization brings both good and bad job news.
The bad news is that jobs will be outsourced from high-cost developed
countries into lower-cost locations as soon as the associated economic
activity becomes mechanized and predictable. The good news is that
globalization creates opportunities that can be realized by people bold
enough to transform new ideas and knowledge into innovations. In that way,
entrepreneurs will play a vital role in creating the jobs of the future by
transforming ideas and knowledge into new products and services, which will
be the competitive advantage of the advanced economies.

The China Shock has challenged economists’
benign view of how trade integration affects labor markets in developed
countries

Economists have long recognized that free trade
has the potential to raise countries’ living standards. But what applies to
a country as a whole need not apply to all its citizens. Workers displaced
by trade cannot change jobs costlessly, and by reshaping skill demands,
trade integration is likely to be permanently harmful to some workers and
permanently beneficial to others. The “China Shock”—denoting China’s rapid
market integration in the 1990s and its accession to the World Trade
Organization in 2001—has given new, unwelcome empirical relevance to these
theoretical insights.